January 6, 2010

Host: Ted Simons

Arizona Job Recovery

Economist Elliott Pollack discusses a job recovery report his firm recently prepared for the Speaker of the Arizona House of Representatives.
The report contains a list of recommendations to grow high quality jobs and improve Arizona’s economy.

Ted Simons: Good evening, and welcome to "Horizon." I'm Ted Simons. The Arizona state treasurer sent a bill to the federal government for the cost of illegal immigration. Treasurer Dean Martin sent the invoice for $1 billion to homeland security secretary Janet Napolitano, who used the same tactic when she was governor. Martin says it's a 10-1 shot that the federal government will pay the bill. The city of Phoenix is facing tough budget cuts over the next two fiscal years. Budget and research director Cathy Gleason says the city face as shortfall of $245 million. Officials will present a budget to the city council on February 2nd, and cuts to vital Service and layoffs could be part of the plan to close the budget gap.

Ted Simons: House speaker Kirk Adams has announced an economic and job recovery bill to be introduced in the house after the legislature convenes next week. The bill calls for reducing corporate income taxes. It also offers companies tax incentives to attract and retain high-paying jobs, especially those in manufacturing, development, research, and mining. The bill is based on a report prepared by Elliott Pollack and company, and here with more is the company's CEO, economist Elliott Pollack. Good to see you again. Thanks for joining us. You base everything by saying that Arizona's economy has not evolved since the 1950s?

Elliot Pollack: It really hasn't. If you look at our history, most of the companies here today, not all, but most of them are grandchildren of companies that came here in the '50s and '60s, and when we were very strong, very good at economic development, had much more competitive taxwise, and we have lived on our laurels for a long time. It's finally caught up to us in this recession. This recession exposed the weaknesses of a population-based economy. It's imploding, plus people aren't showing up. We have to get high-wage jobs here. The other thing that's happened since the '70s, anyway, is that per capita personal income, which is an economic euphemism for stand of living, has been declining in Arizona relative to the U.S. And that's because the jobs we have beginning here have not been high-wage jobs. We've been -- we have not been good at getting those, and we're finally paying the piper.

Ted Simons: Gung ho in the '50s and '60s to get the big boys in town. What happened to the gung ho?

Elliot Pollack: Well, I think we became complacent. And we started basically biting the hand that feeds us, killing the goose that laid the golden egg, whatever you need. Let me explain the structure of this thing. If you think about the ghost towns of the old west, they became ghost towns because the reason for their existence went away. The mine petered out, the railhead moved, there was a drought so there was no more agriculture. Those things that brought money in from the outside, they stopped existing. The reason -- and so what happened is everybody left. The barber left, the mercantile store left, because money wasn't coming in, so those domestic sector companies had no money to chase. Well, essentially the reason we're here is because Boeing is here, because Intel is here, because JDA software is here, because American Express's regional office is here. If we don't attract those companies that pay above average wages, we're destined to have essentially a third world economy. Now, it's not only the high wages, but it's the multiplier effect. For every one job at Boeing, there's another 2.2 jobs created. Basically there are 3.2 jobs based on that one job. And they tend to be higher wage jobs.

Ted Simons: OK. So the idea is to get the big boys here-the Boeing’s and the base companies here.

Elliot Pollack: And then there's more money for the domestic sector companies, the Dillard's, and the Circle-Ks, and the Arizona Diamondbacks, and the banks to chase, there's more money bouncing around.

Ted Simons: Can you provide incentives for the big boys and not also put in the other guys chasing the multiplier money?

Elliot Pollack: You want to design it so as much as possible it's just hitting those base industries. Otherwise you end up with something called dead weight revenue loss. But, the way this is designed is that the incentives are paid for by the people that come in. In other words, we're not paying more to get a company here, than they're bringing in. So the original economic structure of this thing, which is a little different than what finally came out, was designed specifically to avoid that dead weight revenue loss.

Ted Simons: What finally came out was a series of tax cuts, including income tax cuts. And I know you didn't necessarily talk about that in your report, but the Pugh center on the states had a study saying that Arizona has been hurt by tax cuts, mostly income tax cuts, since the 1990s, and that talk about chickens coming home to roost, now we're not getting much revenue with spending accelerating here in the past few years, which is putting us where we are.

Elliot Pollack: OK. I won't get into the debate about whether it was tax cuts or spending. That's irrelevant. The issue here is to have a tax structure and incentive structure that gets us in the game to get these big guys here. To me, that means you have to incent the base sector industries. And I don’t even mean mining, quite frankly. I mean manufacturing, I mean guys who could pick up tomorrow and go somewhere else. If there’s a manufacturer here who could be in Austin tomorrow who could be in Tennessee tomorrow. We got to consider that, because they’re going to not only take that one job with then they’re going to take the other 2.2 because of the ripple effect. A company that’s going to be here anyway we don’t have to incent. But, in effect, you basically have to deal with the corporate tax rate, corporations don’t pay a lot of taxes anyway, just because of the way they’re structured at least not the base industries so we’re not losing a lot there. And the property taxes: originally we wanted a separate class for base industry jobs, there’s some question to the legality of that. But everything else, all the incentives, the job training money, the governor’s closing fund, the expansion of the enterprise. Those things pay for themselves, they don’t cost the taxpayers anything. They come out of money that these companies bring in and are paid for by those companies.

Ted Simons: So with that in mind, when critics say, basically, this is helping big business at the expense of the middle class, at the expense of homeowners, local cities, towns, you say?

Elliot Pollack: I say nonsense. It is helping big businesses because most export or base sector industries are big, that’s by definition. They have international and national markets. And so, yes they’re being helped. But think who’s really being helped. If Boeing leaves, not only that one jobs leaves, but another 2.2 leave. So essentially the average guy, basically, will lose is job. Compare that to let’s say, a retailer, who has a multiplier effect of 1.6, or even tourism which has a multiplier effect of 1.7. This is the best way to expand your economy, to get high wages in here and increase your standard of living. Is it perfect? No. But I’ve got to tell you I’ve been doing this for 40 years and this is the one that has the most economics behind it. In other words, what finally came out had a lot of what was in our report. A lot of times the state does things, like the citizen’s finance review committee, where nothing comes out of it because politics gets in the way. My guess is that when the dust finally settles and politics between the Democrats and Republicans gets involved, it’ll look a little different than it does today.

Ted Simons: But I was gonna say, politics always gets involved. Will politics get involved to the point where your report and what you’re calling for here becomes a distant memory?

Elliot Pollack: The answer is, I hope not. But if it does, I’ll be the first one to tell you that it’s nonsense.

Ted Simons: Another idea –another criticism-is that regardless of how much it costs the state. And you’re saying that this thing shouldn’t cost the state much, if anything at all.

Elliot Pollack: With the exception of the income tax – personal income tax.

Ted Simons: Yes, indeed. Um- that when corporations and CEOs are looking to move, it’s in your report here: Number one is transformation infrastructure, number two is existing workforce skills, third is state and local tax scheme, which makes sense. But what happens to infrastructure and workforce skills – euphemism for education – when there’s no money for it.

Elliot Pollack: Well, let’s take it a step at a time. First of all, you have to get in the game. In other words, it’s great to have great transportation or a good school system. But if you’re not in the game it doesn’t matter. You have to have a corporate tax rate that makes you competitive, and you have to incentives that make you competitive. Otherwise none of that other stuff matters. And by bringing that in, it will create more tax revenue because the economy is growing more rapidly. So it will create more tax revenue to build the very things – the roads the schools , the things we really need – once the economy is growing again.

Ted Simons: So basically, when people say, like the critics are basically saying, that this is the wrong time for any kind of tax cut. And certainly – the bill is to be phased –

Elliot Pollack: Yes phased in over four years.

Ted Simons: Starting in 2012?

Elliot Pollack: Right.

Ted Simons: Even that’s too soon, say the critics.

Elliot Pollack: Well, again, I’ve been a practicing economist in Arizona for 40 years. If we don’t do something now, If there’s no political will in this environment to do something to help create quality jobs it will never happen. And we are destined to have a lower standard of living relative to the U.S.

Ted Simons: The phrase “political will”. We started the conversation with what happened in the 50s and 60s . Getting the big guns here and letting them flower, that whole euphemism. Is Arizona the same now as it was in the 50s and 60s?

Elliot Pollack: Well there was great leadership back then. We had a lot of leadership in the congressional delegations, and I see that lacking now in terms of bringing jobs to Arizona. And I’m hoping we can find some Republicans and some Democrats who’ll sit down and find a reasonable solution. Keep in mind there’s two issues here. There’s the budget issue and there’s the economic development issue. This is to create a situation where we bring in companies that prevent us from coming into this particular economic environment again.

Ted Simons: And yet, can you divorce that from the budget issue when the budget issue is so big?

Elliot Pollack: Well, I think they’ll have to both be resolved pretty quickly.

Ted Simons: Ok. Are you optimistic about Arizona’s future?

Elliot Pollack: I think we are at a crossroads. I think you have to strive not to grow and you have to strive to grow well and we haven’t been doing that over the past few decades. And if we don’t do it, there’s no reason to expect that we’ll have turned the corner. So, I don’t know, ask me in three years and I’ll tell you.

Ted Simons: Last question here, before you go. I’m going to try to get some movers and shakers that come to the program to answer one basic question as the year goes on. Your vision for Arizona, what do you see?

Elliot Pollack: Well, again, what I think I’d like to see is a state that’s competitive, that brings in high quality jobs, that allows you to have a higher standard of living, that allows you to have money to fund infrastructure and education to the point where people are getting what they think they’re getting. And that we basically go into the sunset growing quality jobs and growing a better standard of living. Whether that happens is still up in the air.